This article explains a lot of Corporate America. Banks and investors make money by doing nothing; they write a check, they get a check back for more than the original. Therefore, they don't care if the employees or customers are happy, they only care about maximizing the chance that they get their check tomorrow.

This is obviously shortsighted in the case of Zappos. You can buy shoes online from anywhere. The user selects the shoes he wants, you put them in a box, you ship the box. Take away the "expensive" features of Zappos, like good customer service and free shipping, and your customers will just go somewhere else, leaving you with nothing.

Amazon has a clue about dealing with customers, so I think Zappos will be OK. But if the banks and VCs took over, Zappos would have become another data point in the portfolio of "being nice fucks you over". (But really, it's the banks that are fucking you over. Or perhaps, the people that default on their loans are fucking everyone else over.)

The banks and investors are investing in enough places that the risk is pretty minimal. Some people would tell you the ones who simply invest money are putting the most on the line. In the case of the majority of investors, this is completely rediculous.

Yes, the investors and board are their to maximise the return. The job of the CEO is to sell the vision to them and keep them on board. That the company sailed into a headwind not of their own making and the board got jumpy is yet another challenge on the way to large growth.

The board members would probably have lost personal money and dented their careers if Zappos had lost it's funding lines. They certainly do not 'make money by doing nothing'.

If they didn't maximise the change that they got their check back tomorrow, a lot of stuff would fall in a heap as people took stupid risks.

Getting out a broad brush and painting 'corporate america' is not an insightful analysis.

"Banks and investors make money by doing nothing" this is false. Weeding out bad wanna be founders, for example, is important, difficult and something VCs spend a lot of time doing. If being a VC was so easy they would be paid like janitors.

"Therefore, they don't care if the employees or customers are happy" You are wrong, they do. Customers write the check and employees deliver what they write it for, obviously they have some influence on whetter the check arrives or not (and how big it will be)..

"they only care about maximizing the chance that they get their check tomorrow" They care about maximising profit, this obviously involves planning for the long term. (A company expected to earn more money in ten years will be worth more right now.)

"This article explains a lot of Corporate America." You don't get corporate america. Hacker news is great for technical news but there is a surprising amount of this kind of simple/uninformed anti-market rhetoric.

Marx thought the same thing, and decided that to remedy the situation the lower class should steal the capital from the upper class. Marx was wrong, and so are you.

Cynicism about capitalism is popular in this recession, but that speaks less about the failures of capitalism and more about the fickleness of public opinion. Allocation and management of capital is a bit harder than throwing money at things and expecting it to stick, as millions of American investors have discovered over the past two years. Anyway, it seems ironic to have this pseudo-communist whining on a board run by a venture capitalist.

> Anyway, it seems ironic to have this pseudo-communist whining on a board run by a venture capitalist.

Huh? Why are you trying to call people 'communists' now? Please don't try to turn this into some sort of political mud-slinging contest.

The bottom-line in this discussion is that Zappos's culture and customer service was the thing that set it apart from other retailers. It was the reason that people wanted to shop there. To try and marginalize the effect this has on Zappos' bottom-line because it can't be easily quantified in terms of dollars and cents on a quarterly earnings reports by calling it a 'social experiment' or 'insignificant' is short-sighted at best.

> Allocation and management of capital is a bit harder than throwing money at things and expecting it to stick, as millions of American investors have discovered over the past two years.

That may be true, but investing money in a business does not make you an expert in that business's core competency.

Correction: I called the GP post a 'pseudo-communist rant' I'm not saying jrockway is necessarily an actual communist, or even a pseudo- one... rather that he has, whether on purpose or not, stated a classically Communist belief about capitalist political economy.

That is, I wanted to point out that the claim being made--that capital owners, in capitalism, add nothing to the capital they own--is fundamental to a philosophy we now understand to be old, bad and dangerous.

It is ok to call a piece of text communist if it contains ideas or opinions that are typically communist. That capital markets in general are unnecessary, (very) ineffective at capital allocation (as opposed to the alternatives) and/or immoral is something almost only communists/hardcore socialists believe today. (It was actually once a widely held belief. A belief reflected in the nature of some new deal programs, Mussolini's economic policy or post-colonization economic policy in the third world to mention some examples.)

It's astonishing that this got downmodded. Marxists did think that banks and investors did nothing (or, at least, that they did whatever they did badly and should be replaced with an elite of planners.) Pseudo-communist rhetoric (as in rhetoric without any real connection or commitment to communism per se) is indeed very popular in a recession.

when you ignore risk stupid ideas start making sense, like jumping a bus with a motorcycle. it must seem grossly unfair that the head of a corporation is wealthy if you ignore all the people who failed and the risk that person took making that company successful.

What risk? The risk of a person who would be broke if it failed? That is a big risk and he certainly deserves to be wealthy if it works out. The risk of a person who loses 0.00001% of his wealth in the absolute worst case? That's no risk at all, the people who are working for the company are risking vastly more.

risk and reward are commensurate in a free market, otherwise someone will arbitrage until it does. the man who risks only .00001% of his wealth only stands to gain .000001% of his wealth. yes, banks are able to diversify their risk over a huge number of borrowers, thus they are able to offer much lower rates than would ever be realistic in a scenario that 1-to-1 matched specific borrowers and lenders. they thus make more capital intensive ventures more accessible.

>risk and reward are commensurate in a free market, otherwise someone will arbitrage until it does

Would you mind providing a citation that proves this? Also I'd like to know what you mean by "free market". Are you speaking hypothetically here, or relatively?

>the man who risks only .00001% of his wealth only stands to gain .000001% of his wealth.

Nonsense, how do you come up with such a number? How much the man stands to gain is unbounded. If for example, some investor's .00001% was $100k, with which he bought 20% of a company that ended up being the next goggle then he would make billions from thousands.

When employees log in to their computers, we ask them to look at a picture of a random employee and then ask them how well they know that person -- the options include "say hi in the halls," "hang out outside of work," and "we're going to be longtime friends." We're starting to keep track of the number and strength of cross-departmental relationships -- and we're planning a class on the topic.

I thought he meant it was more meta than that, in that rather than sitting everyone down and explaining how to be friends, he'd get the managers in and help them create an environment in which it happens naturally.

While reading the article I read that part not like they were tracking the relationships but rather using the form as a survey to get a feel of how good different departments got along and knew each other. Basically, I felt like they were keeping the whole thing anonymous.

If they're not, in that case, yes, it is very creepy. But I really doubt it.

I'm not so sure. You can anonymise the data and it wouldn't effect the intended result. The whole premise is to track relationships between _departments_ so the actual identities in question matter less.
You just want to try to prevent a "them" and "us" culture.

To provide a software analogy you want the platform group to be friends with the application group and enjoy working together. I've experienced a split myself where one team would just blame the other team for the problems in the final solution and it isn't productive.

I agree with MicahWedemeyer -- it's creepy. I went from being very impressed by Hsieh's article to being completely creeped out in the last two paragraphs (and being glad that I'm not his employee). I fully understand the desire to have employees interacting across departments, but this IMHO this is a terrible way to try to acheive that.

Meeting people isn't always easy. I think that events and social experiments like this can encourage interaction in a new/fun way. At the very least people at the office will be talking about it, which will likely lead to new fruitful interactions.

In addition to Dunbar's number, there's a few other magic numbers that crop up in the statistics of human societies over and over again:

2 - The most basic. Think romantic relationships, best friends, business partners, etc.

6 - The "group." Common chimpanzees patrol in groups of six. Next time you go to a party, notice the maximum number of people that can engage in a conversation. Its nearly always six.

Fun tip based on this: If you want to join a lively conversation, walk up to a group of six people and begin to talk to two of them. The group will naturally fission into two groups of three and four.

30 - The "tribe." This is your extended group of friends, or the maximum number of children that can be put in a classroom. Everyone knows everyone well. This group can be mustered to complete a common task without much trouble.

150 - The "nation." This is Dunbar's magic number, derived from the size of the human neocortex. This is the maximum size a group can reach where everyone has at least a passing relationship with everyone else. It is the last natural group size.

Any group beyond this stretches human social instincts, and requires social constructs such as rules or laws to augment it.

There's lots of discussion here at hn about MBAs and I often comment about how little use I got out of mine. I remember little from marketing, finance, and operations classes. But I remember the case studies. The comprised almost half of the curriculum. And I hadn't thought much about them for years. Until reading this post.

This reads like a Harvard Business Review case study. It's got everything that makes for good business reading: compelling ideas, profit and loss, tradeoffs between profit and growth, economic considerations, competing interests, and most of all, characters. For a minute there, I thought I was reading Lee Iacocca. This could even make a great Hollywood script.

This makes me want to read some case studies! Does anyone know of a good source for (ideally free) case studies, or does one always have to pay? I did a search for HBS case studies and found them for sale....

I had no idea Zappos was so big (1800 employees, over $1.5B in revenue), but with a founder like that, I can see why. He clearly cares a lot about his employees and his company's vision. What an enthralling story too!

Eh? Most big retail businesses finance inventory this way. Ahold (big supermarket holding company) with a market cap of 15 billion and a revenue of a little under 40 billion almost went bust a few years ago because of a similar reason. It's too expensive for a company of that size and in that market to use its own capital for financing inventory - margins are like 3 percent, 5 percent if they're selling premium products. There's no (financial) room to keep 10% of their revenues laying around in warehouses.

Besides, those that don't have credit lines from banks have them from their suppliers - with the same risks and conditions.

What, and let shareholders wait for three years for any profits? These businesses operate on the edge - in the margin as an economist would say. They need every single bit of competitive advantage to survive. Storing capital that can be put to productive use in a warehouse is a liability, to be remedied asap. Every business has risks, credit risk is just one of the many. When managed well, there is no problem with relying on outside credit to finance short-term debts. Running a big company (or a country, for that matter) is _not_ the same as balancing a household budget. Risk is an essential part of doing business, and managing risk is one of the aspects that can give a company a competitive advantage.

A few days ago there was a link here on HN about marginal advantages in game design, how the best Starcraft players thrive in environments where they are just a smidgen ahead of their opponent, and maneuver themselves in such a position, in contrast with the amateurs who want to 'win big' - have a big lead and crush their opponent in an overwhelming fashion. It's an eye-opening read, putting in words a property of winners that I never quite managed to capture myself. The theory applies to businesses equally - in a mature market, you can never be hunkered down, playing an all-defense game while you build up resources and then crush the opposition. By that time, that competition will have eaten your lunch and driven you out of business.

Of course cash on hand has value. Question is how much of it is needed to optimize profit. And of course credit lines cost money. That's where the 'risk management' part comes into play. My point is that there are hundreds of people running models and doing calculations on what the optimal way to finance operations in a company of that size is. Contrary to popular opinion these people aren't stupid. It's unreasonable to, a priori, rule out financing inventories with credit, just because there is risk involved. It's about balancing pros and cons, and whoever balances it the best, wins (i.e., makes most profit, or can lower prices to gain customers and grab more market share, or buy competitors, or...)

(about Ahold, without knowing the details, the liquidity problem was at the time when details of shady accounting in a US subsidiary came to light. You can't issue more stock in a few days to cover immediate liquidity problems. plus investors aren't going to be too happy when you're diluting their stock just to cover an operating loss. It's a different thing when you're doing it to raise money to expand the business.)

No, optimizing for profit ignores your risk to capital. The US banking history has a long history of Martingale style investments where a high probability for modest return risks huge amounts of capital. http://en.wikipedia.org/wiki/Martingale_(betting_system) The important difference is banks risk far more capital than they have so a Martingale style bet works in their favor.

Alhold however, was risking 15 billion in capital to make a modest return. IMO, if you’re going to risk 15 billion then go whole hog and run a financial institution to better balance your risks. Why risk zero when you can go all the way to negative 15 billion etc.

PS: I know that's not what you meant by optimizing for profit, but they were still making a 15 billion dollar bet for a few millions of dollars in annual return.

Yes, I meant 'optimize for profit/risk ratio' I think - Ahold is a 'safe' company so low profits are tolerated by investors in return for a 'certain' return, as compared to investments in high tech where a higher yield is demanded because the risk is higher.

I think we're on the same page but I don't understand your last line - are you saying that companies with 'low' (single digit) returns are suboptimal choices for investors?

What I meant by they were still making a 15 billion dollar bet for a few millions of dollars in annual return. was the company risked its market cap for whatever return they received from their approach to managing money. Credit crunches are not uncommon and often kill large companies when something bad happens in the middle of one.

As to safe return, as you say their stock holders where paying a premium for safety and unless the R/W was awe inspiring I suspect most of them would rather gone to safer route.

Oh, I guess we're not on the same page then after all. They're only "risking" 15B in the sense you're implying in a black/white world. They were/are taking a calculated risk, well within 'normal' bounds, and certainly within well accepted bounds for most investors (as in, investors with the most money on the line). Credit crunches 'often' killing large companies is hyperbole. Small companies yes, but for large companies it's relatively rare as far as I know. Then again what do I know, I'm open to number that prove me wrong.

(Like it says in the OP) Zappos is not a public company, and if the Zappos board had been confident that Zappos could become a public company, they would not have objected to the direction desired by the CEO.

For more fun and games take a look at an airline business funding one day. One hiccup with a line of credit, particularly fuel credit, can bring an entire airline down in a matter of days.

The risks of funding retail lines of credit are not for the fainthearted. Get some bad purchasing going, end up with a load of junk in the warehouse that customers don't want and the business can't pay for ; the whole thing unravels very fast.

when extremely large purchases are made between two large companies, the terms of payment can get very complicated, which is why you need banks in the middle. have you ever thought about how you would go about purchasing $1B worth of shoes? Hint: you don't put it on the company amex.

Agreed. This article was adapted from Tony's book, Delivering Happiness, and it just so happens that today is the official release: http://www.deliveringhappinessbook.com/ I was planning on getting the book, but after reading this article, I went ahead and orered it. Can't wait to read it.

Take-a-away... VCs funding is not a good idea. They just want to grow their investments and not grow the business. To build a great company, you need to have some form of identity... To think Zappos is a Billion $$$ company that sell shoes, etc. Crazy..